Many Reasons to Lower the Corporate Tax Rate

March 22, 2013

Currently, the United States levies the highest statutory corporate tax rate in the developed world, which many policymakers and economists believe discourages investment and reduces international competitiveness. Opponents of reducing the corporate tax rate claim that reduced revenue would be a crucial blow to an already unbalanced budget. But reducing the corporate tax rate would pay for itself by stimulating the economy, says Michael Schuyler, a fellow at the Tax Foundation.

Not accounting for growth effects, a zero percent corporate tax rate would result in $196 billion in tax revenue losses, which shrinks by $28 billion for every 5 percent increase in the federal corporate tax rate.

After accounting for growth effects, reducing the corporate income tax would create a large jump in private businesses' capital stocks, a substantial rise in employment and labor compensation, and a healthy gain in gross domestic product (GDP).

The rate at which corporate tax rates are maximized to create a progrowth environment is much lower than the current U.S. rate.

The Tax Foundation models indicate that capital stock and hours worked do not remain static across all tax rates. As the corporate tax rate lowers, capital stock increases by roughly 10 percent and hours worked increases by 0.4 percent at a 20 percent corporate tax rate.

The model also shows that the long-term growth rate for GDP would rise by 2.2 percent at a 25 percent corporate tax rate but fall by 2.8 percent at a 45 percent corporate tax rate.

After accounting for growth, lowering the corporate tax rate would increase total federal revenue.

Revenue would increase through a wide variety of taxes, fees and payments that would expand when the economy grows with a lower tax rate.

A lower tax rate causing the economy to expand would raise income across all adjusted gross income categories by an estimated 1.97 percent. Reducing the corporate tax rate would lead to temporarily reduced federal receipts but after about five years would lead to a permanent increase in revenue.

Congress should accept that tax changes have growth effects and lower the corporate tax rate. A lower rate would lead to a more vibrant economy and greater revenues from a lower tax on increased economic activity.